Va Loans For Investment Property: Can It Be Done
Competitive interest rates. Low closing costs. No annual mortgage insurance, and no down payment*.
Its easy to see why so many veterans and active-duty military servicemembers take advantage of their VA loan benefit.
Some homeowners wonder if they can also tap the benefits of VA loans for an investment property.
Technically, the answer is no: VA loans can only be used to purchase primary residences, not vacation homes or investment properties.
But with the right strategy and enough patience, you could use VA loans to build a real estate portfolio that generates income and retirement savings.
Can A Va Loan Be Used For An Investment Property
Because VA loans have fewer restrictions than conventional loans, many borrowers wonder if a VA loan can be used by real estate investors. In some cases, it may be possible to use a VA loan for an investment property, as long as all of the rules are followed.
Rule #1: Military service
A borrower must be a Veteran or an active service member that meets certain eligibility requirements based on service.. National Guard and Reserve members may qualify for a VA loan, as well as surviving spouses of a Veteran or of a Veteran missing in action or held as a prisoner of war.
Rule #2: Primary residence
Property must be occupied by a borrower as a primary residence in order to qualify for a VA loan. However, a borrower may be able to house hack by renting out a room in a single-family home, a detached apartment on the same lot, or non-owner occupied units in a multifamily property.
Rule #3: One to four unit property
A VA loan may be used to purchase a single-family home or duplex, triplex, or fourplex multifamily property. A single-family home may also qualify for VA financing if there is a separate rental unit on the same lot, such as a free standing garage converted into a studio apartment.
What Is A Va Loan
A VA loan is housing assistance provided by the Department of Veterans Affairs. There are two main types:
- A VA direct home loan is where the Department of Veterans Affairs serves as the lender.
- A VA-backed home loan where you get a loan from a private lender but the government guarantees a portion of it, resulting in a lower interest rate and more favorable terms.
The most popular type is a VA-approved home purchase loan, which allows qualified borrowers to buy or build a new home. Most people use VA loans to buy an apartment or house, but you can also use it to purchase a fixer-upper or make a current home more energy-efficient.
There are even cases in which you may be able to use VA home loans to buy land. However, you have to meet several conditions for it to be an eligible purchase. Well get into the details of that in just a bit.
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My Spouse And I Are Both Servicemembers Or Veterans And Are Eligible For Va Home Loans Can We Use One Of Our Loans To Purchase A Vacation Home Or A Rental Investment Property
No, you can’t. VA loans are only for a primary residence.
If two servicemembers each have a certificate of eligibility, a home you buy together still has to be one that you will use as your primary residence. That means that you cannot use your VA Home Loan benefit to buy a second home for investment purposes or for use as a vacation home.
If you already have a VA loan for a property used as your primary residence, it may be possible to use that home as a rental property and use your remaining eligibility to purchase another home for use as your primary residence. Before trying to use this option, though, it’s very important to consult your Regional VA Office for details and confirmation regarding your remaining eligibility.
Investment Property Mortgage Requirements
Mortgage lenders get to set their own requirements. And the guidelines for investment property loans are usually stricter than for a primary residence.
Though rules vary by lender, here are the broad guidelines you can usually expect to see for an investment property mortgage.
- Minimum down payment: Often 15%, though some lenders still require 20%. Youll get better rates with 25% down
- Minimum credit score: 680 with a 15% down payment 620 with 25% down
- Maximum DTI: This is your debt-to-income ratio. Typically, your non-housing debts should be no greater than 28% of your gross monthly income. And your total debts plus housing costs shouldnt exceed 36%. But some lenders are less strict, often allowing 36% and 45% respectively
- Cash reserves: Many lenders want you to have cash reserves that are sufficient for you to cope for six months without rental income
- Loan limits: Government-backed mortgages and conforming mortgages have limits on the amount you can borrow. These vary according to local home prices
- Documentation: Expect lenders to request two years of tax returns, two years of W-2s, and two months of bank statements at a minimum
In addition to your finances, mortgage lenders will also evaluate the property you hope to buy.
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What Are The Rules For Using Va Loans For An Investment Property
Heres the first rule to remember when youre planning to use VA loans for investment properties: Youll have to live in the home youre buying for at least one year before you can buy another home.
Following this rule aligns your new home loan with the VAs primary mission of helping veterans buy safe and affordable housing at competitive interest rates.
To buy a home with a VA loan, youll also need to:
- Qualify for the VA home loan program: VA loans are available to veterans, active-duty servicemembers, and qualifying surviving spouses from all branches of the military, including Reservists and the National Guard
- Qualify with your lender: The VA insures VA loans but private lenders lend the money. Youll need to match or exceed your lenders borrowing credentials to get approved
- Buy a qualifying home: Not all homes meet the VAs minimum property requirements . The VA wont insure your loan if the home youre buying falls short
- Have enough entitlement: Your VA loan benefits are renewable but only by paying off or selling a home. If you dont have enough remaining entitlement to insure your next home loan, you may need to make a down payment or choose a less expensive home
- Pay closing costs: Every new home requires closing costs to cover legal fees, lenders fees, the VA funding fee, and the cost of third-party services such as the VA home appraisal
How To Purchase Land With A Va Loan
There are three ways that you can use your VA loan to purchase land and build your new home:
- VA-only: Use the VA new construction loan to finance the entire home purchase, including the land and the construction. You need to build a home at the same time that you acquire the land, not later.
- Split loans: Finance the land purchase through another type of loan. Then, use the VA loan to build your home.
- Refinance: Finance both the land purchase and new home construction with a different type of loan. Then, once the home is completed, refinance it into a VA loan.
When youve decided on how you will go about it, you can begin the long and arduous process of becoming a homeowner. Heres the process
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What If I Need A More Expensive Home
In the example above, we learned the VA would cap your no-down payment loan size at $340,250, based on current VA loan limits, if you were already using $50,000 of your entitlement.
But what if the home youre buying costs $500,000? Youd need to come up with a down payment.
The good news: You wont need to come up with the full difference between your maximum loan size and your home purchase price. With most lenders, your down payment would need to cover a fourth of the difference.
In our example, theres a $159,750 difference between the VAs maximum loan size and the homes price . A fourth of that difference $39,937.50 would be your down payment amount.
Confusing, right? Your loan officer can help you better understand these complex rules.
And its possible you wont run up against these loan limits at all.
For example, if you were buying a home that costs only $200,000 and you were already using only $50,000 in current entitlement, youd have plenty of room left for the VA to insure another no down payment loan.
How To Buy An Investment Property With A Va Mortgage
Purchasing a multi-unit property gives you the option of renting out the unused living units in your new home. This is permitted under VA mortgage loan program rules.
What is not permitted? Buying property you intend to turn into an Airbnb, condohotel, frat or sorority house, bed-and-breakfast, etc. Short-term rentals are generally not allowed for government-backed mortgages. You may find that rentals of 30 days or less are specifically prohibited depending on the mortgage loan you seek.
Some borrowers choose to purchase property with a VA mortgage and refinance it with a VA Streamline Refinance loan which normally is required to result in some form of a tangible benefit for the borrower.
Using an FHA Streamline Refinance, you do not have to certify that you will use the home as your primary residence, but rather that you have used the property as your home in the time leading up to the loan application.
This is a good strategy to consider if you want to use the house you bought with a VA mortgage as a rental property but without you having to live there.
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Can You Buy A Multifamily Home With A Va Loan
Buying a multifamily home with a VA loan comes with several benefits. For instance, you dont need to pay for mortgage insurance and theres no down payment required in most cases. You can buy up to four units with a VA loan, with the exceptions of joint loans that may allow you to buy more.
Be ready to become both a landlord and a homeowner quickly, though. You may have to move into one of the units within 60 days after the loan is closed and make the unit your primary residence and live there for at least the first year.
Veterans & Active Service Members
- You meet the minimum active service requirement based on VA guidelines. Most require you to have served 90-181 days, depending on which tour you were called on.
- You did not meet the minimum service requirement, but you were discharged for a service-related disability.
- You did not receive a bad conduct, other than honorable, or dishonorable discharge.
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How Many Units Can I Buy With My Va Loan
Potential homebuyers can buy up to a fourplex with their VA loan by occupying one unit and renting the additional three.
Our LenderVeterans United Home Loans is a VA approved lender Mortgage Research Center, LLC NMLS #1907 . Not affiliated with the Dept. of Veterans Affairs or any government agency. Not available in NV. 1400 Veterans United Dr., Columbia, MO 65203. Equal Housing Lender
Ability To Waive Funding Fee
Certain people are able to waive the funding fee. This is a HUGE benefit. If you fall in this category, the VA loan is a no-brainer for you. It will be an excellent value compared to other options.
You do not have to pay the fee if you are a:
- Veteran receiving VA compensation for a service-connected disability, OR
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability
If the lender is able to verify from the VA, usually through the certificate of eligibility , that you are exempt, you will not have to pay this fee at closing. If there is any doubt or your disability claim is still pending, you will need to pay. You can file for a refund when your claim is approved and you have all the appropriate documentation.
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Can I Use A Va Loan For A Second Home
The VA home loan program exists to help active duty and retired military members buy homes to use as primary residences.
Because of this intent, borrowers cant use their VA loan benefits to buy a vacation home or rental property.
But it is possible to buy a second home if you have enough remaining entitlement and if you plan to move into the second home after buying it.
The Investment Property Loan Process
If you plan to finance your investment property with a mainstream home loan , the process will look very similar to any other home purchase. You will:
As when buying a home for yourself, its a good idea to get preapproved for a mortgage before you begin house hunting. That way, youll know how much home you can afford. And, more importantly, the seller and sellers real estate agent will know youre making a serious offer.
Before you settle on a lender, make sure to comparison shop for the very best mortgage rate you can find. Investment property mortgage rates are often 0.50 to 0.75% higher than those for standard mortgages. And the lower your rate, the higher your profit margin on the property will be.
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How It Actually Works
As of this writing, there is a 3,700 square foot duplex in Las Vegas, NV with a sale price of $315,000. The second unit provides $1,400 a month in rental income.
Assume that you put zero down and finance $315,000 plus a $6,772 VA Funding Fee. Your total monthly payment, including taxes and homeowners insurance, would be about $2,000 with a 4.5 percent mortgage rate.
If you dont count the rental income towards your mortgage qualification and have no other debts, youd need qualifying income of $4,878 a month to get loan approval. Thats because the VA allows up to a 41 percent debttoincome ratio, which is your monthly debt payment divided by your monthly gross income.
If you are able to use the rental income to qualify, you get a different picture:
- The lender would offset the mortgage payment by 75 percent of the rental income
- 75 percent of $1,400 is $1,050
- Subtracting $1,050 from your $2,000 mortgage payment gets you a payment of $950
With no additional debts, your income required to qualify drops to $2,317 a month.
What Is My Entitlement
Your Entitlement is the amount of money the VA is willing to guarantee on your behalf to a private mortgage lender. The VA offers a basic entitlement of $36,000 to each Veteran. A lender is usually willing to loan you up to four times that amount or $144,000. If something happens and you are unable to pay back the loan, the VA will pay 25% of your loan to the lender as a guarantee. However, in many places across the country, its difficult to find a suitable home for $144,000. To ease this problem, the VA decided to link the amount it guarantees to the conforming loan limit for conventional financing as stated by the Federal Housing Agency . Doing that increased the amount available to veterans looking to buy a home. In most counties across the country, the VA will back 25% of your home loan, up to a maximum loan amount of $484,350 . In other words, if you finance a $250,000 home in a county with a limit of $484,350, you are only using a little over 50% of your entitlement.
The VA loan entitlement is yours for the duration of your life. It never expires, and you can use all of it or just some of it. You can even borrow more than the loan limit of $484,350, but most lenders will require some sort of down payment since the VA only backs 25% of the loan limit. Being able to use your benefit over and over is based on how much of your entitlement is available to you, and the reasons behind your wanting to use it again.
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